Wednesday, November 10, 2010

Blumenthal Cash Cow Cartel Challenged

The Competitive Enterprise Institute (CEI), a thorn in the side of Attorney General and Senator-Elect Dick Blumenthal, is challenging in the U.S. Supreme Court what it calls “the $200 billion backroom deal between major tobacco companies and 46 state attorneys general” spearheaded by Mr. Blumenthal several years ago.

The Big Tobacco settlement is Mr. Blumenthal’s marquee suit. During his recent successful campaign for the U.S. Senate, Mr. Blumenthal, who shuttled some of the settlement pay-off cash to his former law partners, mentioned the suit prominently in many of his campaign ads, and on other occasions he has praised himself for providing money to Connecticut's cash starved treasury.

In its petition for Supreme Court review, CEI claims that the “Master Settlement Agreement” violates the constitutional provision against multi-state agreements that have not been approved by Congress.

“The tobacco settlement was hatched in a smoke-free backroom between tobacco companies and state attorneys general,” said Sam Kazman, CEI General Counsel. “The state AGs imposed a massive national sales tax on cigarettes, without a single elected legislator at any level of government voting for it. This was a major power grab by state AGs at the expense of citizens.”

At the center of CEI’s challenge to the tobacco settlement is the U.S. Constitution’s Compact Clause (Article I, Section 10):

“No State shall, without the Consent of Congress …enter into any Agreement or Compact with another State, or with a foreign Power ….”

The purpose of The Constitutional Clause, CEI maintains, is to establish a wall of separation between the states, preventing them from joining together to deprive citizens of other states of their rights.

The multi-state tobacco settlement violates the constitutional provision, establishes a dangerous precedent and harmfully violates anti-trust laws, according to CEI’s petition to the court.

In the “Master Settlement” major tobacco companies agreed to make annual payments to the states in perpetuity, at an estimated cost of over $200 billion over 25 years. Even small tobacco companies that were never part of the state lawsuits or subsequent settlements are required by the terms of the deal to make major escrow payments to the states. On the plus side for Big Tobacco, the settlement establishes a national tobacco cartel that allows Big Tobacco to raise prices while severely restricting its competitors.

Of course, both the settlement and the price increases do not affect the bottom line of Big Tobacco companies. The highly regressive settlement payments are collected by Big Tobacco from consumers who are less wealthy than most taxpayers, and the charges written off by Big Tobacco operate as a hidden tax given to state treasuries by a wealthy cartel whose prices are protected from competition as a payoff for special favors. As long as the states get their take, the agreement stipulates that the attorneys general of the several suing states will not further harass Big Tobacco. As a practical matter, the agreement kills any competition that would lower prices and so reduce the state’s rake-off. Not a bad deal for Big Tobacco and publicity hungry attorneys general with ambitions for higher office.

The whole mackerel in moonlight deal , CEI insists, is unconstitutional. The cartel opposing CEI’s certiorari petition is certain to include cash poor states, publicity starved attorneys general and Big Tobacco, which has profited from a settlement that, in true mob style, enhances cash flow and eliminates the competition.